How attractive is pricing for the proposed National Broadband Network?

Today the Government released a report by McKinsey and KPMG suggesting it could build a National Broadband Network — without Telstra — for about $43 billion. There are potentially strong benefits of widespread public access to the internet, even if these benefits are hard to add up and may not be realizable today, especially for faster broadband speeds. One of the features highlighted in the new report is open access at a low price, around $30 wholesale for the cheapest tier, which would translate to about $50 retail. In an interview with ABC News Radio this afternoon, I was asked if this really is an attractive price. By today’s standards, it does seem low. However there are two important assumptions being made. First, there will be no cost blowouts beyond the mild scenarios outlined in the report (try not to think of Myki). Second, that $50/month will still be attractive when the network is ready in about a decade. Let us not forget that even over the past few years prices have fallen dramatically. OECD data shows that a broadband plan in Australia costing $130/month in 2005 only cost $70 per month in 2008. Prices are falling across the world and this trend is likely to continue: telecommunications technology (both wired and wireless) is experiencing rapid innovation. I’m not saying that the Government should not proceed but that we should view these projections with a bit of caution.

A separate issue is whether Telstra is likely to partner with the Government on this project. They have to decide by June. While there are potential cost savings involved, I suspect it is unrealistic. Leaving aside past personality issues and legal threats, the reality is that both parties have different objectives. The government wants to offer broad-based access at a low cost, including to non-metropolitan areas that are expensive to serve. Telstra would probably find it profitable to offer fiber in metropolitan areas and at a higher price. Would they really want to go all the way up to serving 93% of the population with fiber as the Government intends? In the report, costs are a lot higher for serving the last 10%. This may matter to voters, and politicans, but to Telstra the remaining 10-20% of the population may be adequately served if they had NextG coverage, or less. Plus there is the matter of Telstra’s existing copper lines to complicate matters…

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2 Responses to How attractive is pricing for the proposed National Broadband Network?

After a cursory look at the report, I did a quick back-the-envelope (or -excel) calculation of the NPV based on the quoted 7 years to build and 8 years to operate before making a ROI of 7%. I think the projections of revenues are based on the NBN capturing a significant part (appox. 70%) of the population based on a $30/month plan. If NBN goes head-to-head with Telstra (and Optus) in the wholesale market it is difficult to see that outcome being a likley one.

Given the rate of obselescence in telecoms technology, I’m not sure that 6-7% ROI is a truly acceptable figure. The authors made a lot noise about the backbone being a 40-year infrastructure proposition. Guess they don’t remember France’s grand infrastructure experiment, ISDN Minitel: overtaken by events in IP technology and WWW. Who could have guessed?

Regardless of the technology, I’m not sure I want a government/public service thats struggles with large-scale home insulation and school buildings to take responsibility for this project.

I find the NBN pricing attractive at $50 per month retail, and $55 including a 25Mbps and voice calls. Partly because I currently pay $60pm for a Virgin Broadband (4Gb, 500kbps, shaped, plus local and std calls) and I am looking for more download. Partly because I don’t want to pay $100 for home telecoms (voice and data).
The NBN price is a cost price plus 6-7% bond rate, plus retail markup. Previously we have paid cost, plus Telstra’s 17% cost of capital plus monopoly rent (ie $0.15/Mb excess data).
Broadband prices are falling because of greater retail ADSL competition, and 3G providers slowly sliding down the demand curve to soak up revenue at all price points (a la LCD television falling prices). Good disruptive competitors to ADSL include Exetel (aiming at $1 margin per customer per month), TPG (who recently bought Pipe Networks to avoid undersea monopoly rents), and iiNet. VOIP over falling ADSL charges are pressuring Telstra ($15 billion debt) over falling top line revenue. Hence Telstra is cutting costs against all expense lines (per their latest results).
Two issues however: 1. international data price from submarine fibre, 2. download limits on NBN plans. Both issues need to be positive for the NBN proposal to be of value to me. The NBN report proposes no download limit, that I can see. The NBN report says intentional backhaul is outside the scope of their report.
The full story, with all the missing $$, will finally decide whether consumers will switch to cable. My early reading of the first half of the report (I am up to page 250 or so) is that the report looks very professional, very sensible, and well worth the $25 million to put the report together.
sigh…. Go NBN!